1 Credit insurance: Why ?

2 Credit Insurance: Why ? (1)  Credit in B-to-B relationships is a tool for the commercial development of the seller.  However…

3 Credit Insurance: Why ? (2) … a policy of sale on credit is a major factor of commercial competitiveness.  Nevertheless…

4 Credit Insurance: Why ? (3) … granting a credit to the clients generates a non-payment risk.  Non-payment is one of the main causes for corporate failure.  1 bankruptcy out of 5 is due to non-payment from a client.  Undergoing non-payments means: A loss in margin. The loss of clients, meaning a decrease in turnover

5 Credit Insurance: Why ? (4)  Credit insurance is:  Avoiding non-payments (risk analysis and monitoring)  Debt collection  Payment of claims

6 Credit insurance policy covers current business operations

7 The policy covers current business operations (1)  It covers companies which sell… Consumption goods Small equipment goods sold on a regular basis (tool, machinery, etc) Services International trade operations.  … on credit… With a maximum term of 180 days from invoicing date

8 The policy covers current business operations(2)  … against the non-payment risk, whatever the reason is.  2 types of risk: Commercial risk: legal insolvency. actual insolvency: late payment. Political risk:  Actual political risk: war, embargo, etc.  Catastrophe risk: earthquakes, floods, etc.  Risk of non-transfer of funds.  Public buyer’s non-payment risk.

9 The policy covers current business operations (3)  Exceptions :  War between the 5 Powers and nuclear risk.  Commercial dispute between the buyer and the seller.

10 Credit insurance policy principles

11 The policy principles (1)  1. Application of credit limit agreements on buyers  2. Insured percentage  3. Default period  4. Disbursement limit  5. Subrogation of the litigation action  6. Premium  7. Other fees

12 The policy principles (2)  1. Application of credit limit agreements on buyers The insured company will inform TRADE CREDIT INSURANCE of its insurable clients and ask for a credit limit equal to the possible maximum outstandings in its books. TRADE CREDIT INSURANCE underwriters analyze the application and grant a credit limit: the covered amount of credit.

13  2. Insured percentage A credit insurance principle states that part of the loss is undergone by the insured company. The rest is the insured percentage. The insured percentage amounts to 90 % of the loss or of the credit limit for the accepted buyers. The policy principles (3)

14  3. Indemnification delay: the default period Indemnification occurs after a certain default period: In the case of legal insolvency: within 30 days after the credit is entered as a liability. In the case of actual non payment:  Within 5 months.  When those are over, the debtor is considered insolvent and the indemnity is paid. The policy principles (4)

15  5. Subrogation of the litigation action TRADE CREDIT INSURANCE conducts the litigation action in the place of the insured company:  In an amicable way, directly with the debtors.  In a judicial way, through its lawyers network. Recovery charges are born by TRADE CREDIT INSURANCE. Sums recovered before indemnification are chronologically allocated to concerned invoices and are entirely for the insured. Sums recovered after indemnification are to balance firstly the indemnity paid. The remainder is then transferred to the insured. The policy principles (5)

16  6. The premium base Principle of Globality: The premium base is the insurable turnover: the insured company cannot select individual buyers. Consequently, are not taken into account in the premium base: Advance payments and cash payments. Payments with a letter of credit confirmed by a bank. In-group sales: parent company, subsidiary, sister company. Domestic sales to public buyers. The policy principles (6)

17  The premium rate:  Is given as a %.  Is usually lower than 1% of the turnover.  May vary according to: The company’s business line. The insured turnover. The insured company’s experience of payment. The buyer’s country. The policy principles (7)

18  Terms of payment A minimum premium is set:  It amounts for 80% of the estimated premium.  It can be paid on a quarterly basis, with an adjustment in the end of the covered year.  The minimum premium is a requirement The insured company must state the insurable turnover to TRADE CREDIT INSURANCE every quarter. At maturity, a complementary premium is collected according to the final stated turnover. The policy principles (8)

19  7. Fees  Investigation fees: They cover the costs of underwriting decisions for agreement applications. The policy principles (9)